Vicky Tilson has swapped her comfortable life working in the civil service to become a musician. She left behind a generous pension and a higher than average salary, and plans to top up her £20,000 income with performances and teaching.
The 33-year-old is now keen to get on the housing ladder with the help of her parents and wants to get her pension back on track. But she's also realistic. "The key thing for me is to maintain a comfortable standard of living in my own home, with a car and the odd holiday," she says. "I'm prepared to save what I will need for retirement, and I'm happy to work until I'm 70."
Three financial advisers help Vicky this week, Alex Pegley of Calculis, Kevin Anderson of Budge and Co., and Danny Cox of Hargreaves Lansdown.
CASE NOTES: Vicky Tilson, 33, musician
Income: £20,000 salary with up to £4,000 top up
Monthly outgoings: £685 – includes £570 for
Pension: Around £1,495 a year, plus a lump sum of £2,788, based on current pension contributions
Savings: Abbey cash ISA worth £16,500, Norwich Union ISA worth £1,400 and a Norwich Union Investment ISA worth £892. ING Direct savings account has £5,500.
Debts: £5,000 student loan
All three advisers warn Vicky that by resigning from the civil service, she has left behind one of the best pension plans available. "But she has done the correct thing by leaving these benefits as a deferred pension, not frozen, as many people think," says Kevin Anderson. "These deferred benefits will increase by inflation between the date she left and her retirement."
But Danny Cox says that the greatest gain from final salary pension schemes and the state pension could be by taking them as soon as she reaches the right age.
Until then, he adds: "A £100 per month contribution will cost just £80 because of the tax relief. This could provide her with a fund of £185,000, which would provide a pension in today's terms of around £3,700. This assumes a 6 per cent investment return after charges."
Vicky would like to retire on around £25,000 a year, but Cox warns that this contribution is unlikely to be sufficient to meet her income needs, even when added to her other pensions. "Vicky should save as much as she can as early as possible and build upon that over the years," he suggests.
Vicky wants to buy a house within a year, but the advisers believe this may not be the right time to buy. Alex Pegley warns that most of the downward pressure on property prices is decreasing the amount that is available from mortgage lenders. "As a non-property owner, Vicky may find it more difficult than existing homeowners to secure a mortgage," he says. "The key for Vicky will be the size of the deposit she can get. There are still some 90 and 85 per cent mortgages available, but they are getting fewer and the terms are deteriorating."
And Anderson warns that Vicky's varying employment status will present challenges for lenders. He says that she has made an admirable decision to pursue her love of music "but should try to save as much money as possible and reassess her circumstances in one year's time".
Savings and Investments
Vicky should think about transferring her money from her ING account into an ISA, suggests Anderson. "Many people are unaware that they can transfer between cash ISA providers in order to maximise returns," he adds. Pegley agrees that Vicky should review where her savings are held. "Alliance & Leicester's eSaver, for example, is currently paying 6.5 per cent, and her ISA may also benefit from being moved to Scarborough Building Society at 6.5 per cent," he says.
To find an independent financial adviser in your area, visit www.unbiased.co.uk
For a free financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail firstname.lastname@example.org